Prestar Resources Berhad's (KLSE:PRESTAR) Returns On Capital Not Reflecting Well On The Business

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Prestar Resources Berhad (KLSE:PRESTAR) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Prestar Resources Berhad:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.069 = RM24m ÷ (RM539m - RM187m) (Based on the trailing twelve months to March 2021).

Thus, Prestar Resources Berhad has an ROCE of 6.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.7%.

See our latest analysis for Prestar Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Prestar Resources Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Prestar Resources Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Prestar Resources Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Prestar Resources Berhad to turn into a multi-bagger.

What We Can Learn From Prestar Resources Berhad's ROCE

In summary, it's unfortunate that Prestar Resources Berhad is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 126% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Prestar Resources Berhad (of which 2 are significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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